Degree of Financial Development and Economic Growth in Qatar: Cointegration and Causality Analysis

Waleed Alkhuzaim

Abstract

Utilizing the cointegration technique and Granger causality test based on the Error Correction Model (ECM), this study empirically investigates the long-run relationship and the direction of causality between the financial development and economic growth in Qatar over the period 1990–2012. The financial development is measured by three alternative indicators: a broad money supply (M2) to GDP ratio, bank credit to the private sector as ratio to GDP, and domestic credit provided by bank sector as ratio to GDP. The economic growth is measured by the growth rate of real GDP. The results suggest that a positive long-run equilibrium relationship exists between all three financial development indicators and the growth rate of real GDP. The causality test results indicate that in the long-run, there is a bidirectional causal relationship between the broad money supply to the GDP ratio and the growth rate of real GDP as well as a unidirectional causality, which runs from domestic credit provided by the bank sector as a percentage of GDP to the growth rate of real GDP. However, a causality relationship does not exist between bank credits to the private sector ratio to GDP and economic growth. In the short-run, the findings show a unidirectional causality running from the growth rate of real GDP to domestic credit provided by the banking sector. However, no causal relationship between the growth rate of real GDP and the other two financial development indicators has been found.

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